Economic Imperialism (Volume 2)

Author: Gao Xiaoyong, Editor-in-Chief
Publisher:
Publish Date: 2005-07-01
Features: Twelve years ago, Gao Xiaoyong founded The Journal of Economics News and invited us economists to contribute articles, particularly encouraging us to write essays and that provided in-depth yet accessible analyses of various phenomena based on economic principles. Over the past decade, such articles have played a role in popularizing economics, helping people understand social phenomena more deeply, and promoting economic reforms and development. This has allowed Gao Xiaoyong to compile these essays into a six-volume collection titled Economic Imperialism.
The term "economic imperialism" refers, of course, to the "invasion" of traditional domains of other social sciences by economics. This invasion is not whimsical or baseless but rather capable of analyzing aspects that were previously unexplored, offering new insights and driving disciplinary development. The reason economics can achieve this is linked to its unique analytical methods.
First, economics is not, in essence, the "study of money" as some superficially perceive it. It examines human behavior—how individuals achieve the greatest outcomes under the constraint of scarce resources (including time) through changes in behavior and choices. In this sense, economics is a kind of "behavioral effectiveness science," and its fundamental logic and analytical methods can be applied universally wherever human behavior is involved.
Second, economics studies not only individual behavior but also the interactions between individuals. While this is not unique—other social sciences also examine the interdependent and mutually influential social relationships between people—the reality is that survival needs are fundamental to human beings. All activities rely on the consumption of resources and the distribution of income, making economic interests the foundation of all other interests. Therefore, understanding economic relationships can indeed provide deeper insights into issues studied by other social sciences.
For these reasons, economics appears "dominant," "assertive," and "prevalent." The concept of "economic imperialism" was initially proposed by economists to describe the expansionary trend of economics. However, as the term gained traction, it might lead to misunderstandings, suggesting that economics is all-encompassing or that it boasts of such capabilities. In reality, true economics as a science is quite "humble" or even "meek." To put it more precisely, if someone truly understands economics, they would be humble because they would recognize the limited scope of what economics can explain and address.
First, how an individual makes choices and decisions is something only they can do—even if an economist understands human behavior thoroughly—they cannot make decisions for others. This is because the fundamental concepts economics relies on—"happiness" or "pain," "utility" or "cost"—are entirely "individualistic." Each person has their own unique set of evaluation standards and value systems (economists call these "preferences"), ranging from tastes in food and clothing to ethical morals and ideologies. Moreover, the specific conditions each person faces—abilities, interests, family background, social relationships, and expectations about future changes in their environment—are all different.
Therefore, even if an economist knows that individuals always act according to the "rationality assumption" that everyone seeks to maximize their own interests, we still do not know what specific "interest" system each person is trying to maximize. Economists can provide more information and knowledge to make people's decisions more informed and correct, but that is all—they cannot replace the choices and decisions of each individual (whether individuals or firms)! Economists do not even have the right to judge whether others' decisions are correct because they fundamentally do not know what preference system the other person is based on!
This "individual specificity of preferences" leads to significant limitations in economics' quantitative analysis and "scientific falsification." We can use abstract concepts like "preferences" and "utility" to formulate "theoretical hypotheses" about the basic laws of human behavior, including phenomena like marriage, divorce, crime, institutional reform, and the pursuit of equality, as part of economic imperialism. However, since the "goods or bads" involved in these behaviors do not have market prices (transaction costs of pricing are too high), our quantitative analysis must stop here. Due to the individual nature of preferences and the incomparability of utility between people, we can only offer rough logical frameworks for social behavior in the form of hypotheses but cannot conduct precise quantitative analysis or rigorously falsify these hypotheses.
Second, economics not only cannot replace individual decision-making but also does not intend to change people's values or ethics. Economics always takes the different values of individuals as its premise for analyzing economic and social phenomena and does not consider changing people's beliefs its mission. Whether you prefer sour or sweet, traveling or drug abuse, whether you care only about yourself or also about friends and the nation—all these are merely your personal preferences and value judgments. Perhaps under the influence of ethicists, politicians, priests, writers, or journalists, you can change your values and behavior choices, but that is not the mission of economics as a discipline. Economics only takes your unique preferences as its analytical premise. If you change, it takes your new preferences as the premise, but economists do not fundamentally intend to change your thoughts.
Some people always want to assign economics a greater mission, including changing people's moral values, but if you do that, it would no longer be "economic imperialism" but rather "economic piracy," because that would be seizing something that does not belong to you. Someone once asked me, in a market economy, because of "repeated games," people who lack credibility will eventually face punishment. If people realize this, they will become more trustworthy, so won't the credit morality of people in a market economy improve? But if you think carefully, so-called commercial credit is not because people have changed their credit morality but because they realize that lack of credibility in a market economy is ultimately "not cost-effective" (they will be punished). In other words, it is still based on "calculation" that leads to behavioral changes, not because they have "become better" and thus changed their behavior. Making people "better" is a very meaningful thing, something worth every one of us striving for as individuals, but economics does not consider it its own core task. The core task of economics is to change behavior through institutional and policy changes, such as punishing those who lack credibility.
Third, based on these two limitations, economics' role in public policy issues is also quite limited. Economics can indeed contribute to public policy issues because one of its tasks is to study the relationships between people and how the behavior of one person seeking to maximize their own interests becomes a constraint on others' pursuit of their own interests. Meanwhile, each person's effort to maximize their own interests must take into account the behavior of everyone else as a constraint (all of this is based on the axiom of resource scarcity). Therefore, economics can use concepts like "equilibrium" to tell everyone that our so-called "interest maximization" is actually "conditional extremum" and "unreachable," and that to reach this equilibrium point, everyone must compromise with each other. If you take too much advantage, others and other interest groups will "rebel," and in the end, your losses will be greater.
For example, regarding social equality. Under market economy conditions, the general logic is that as long as there is equal opportunity, legal competition, no deception, no privileges or corruption, the emergence of wealth gaps can only be attributed to innate differences, postnatal efforts, and opportunities, making it unavoidable. However, given any society's ideology at any point in time (which is an "exogenous" constraint condition for economics), if the wealthy group completely ignores the consequences of widening wealth gaps leading to increasingly tense social relations and refuses to implement necessary or reasonable income redistribution and support for the disadvantaged (what is necessary or reasonable? This is also a question that economics finds difficult to answer, and here economists must be very humble!), society may eventually descend into turmoil or even civil war. The conditions and environment in which the wealthy become rich and enjoy wealth will change, which is "not cost-effective" for the wealthy. Meanwhile, if the wealthy pay a bit more in taxes for social welfare, within a certain range, it may be "cost-effective" for their long-term interests (please note that here, economics relies not on the "goodwill" of the wealthy but on their "calculation." Those who hope for the wealthy to "have a change of heart" should think about what they can do if people's consciences never change!).
Here, the "policy recommendations" economics provides to society are not about "pitting one group against another" but about telling everyone that extreme income inequality is not in anyone's interest. However, overly radical public policies and social security systems, like those in developed countries, that aim to establish extensive welfare systems too early are also not in anyone's interest. We should avoid extremes and pursue some kind of "sustainable equilibrium." But if economics is asked to do more, its limitations become apparent. Since the fundamental concepts economics relies on, such as "utility" and "preferences," are "individualistic," it is very difficult to make accurate and scientific judgments about the social effects of public policies. In these matters, the only theoretical tool economics can use is the so-called "Pareto efficiency" or "Pareto improvement."
Pareto efficiency refers to a state where society has reached a point where it is impossible to make one person's situation better without making at least one other person's situation worse. We call this state "Pareto efficiency." Clearly, this state, which is often misleadingly treated as a "best state" by some, is simply a statement that "we cannot make the situation any better." Or more precisely, it refers to: if any further changes are made, economists do not know whether the situation would become better, so they can only recognize this "efficiency" as the "best"! Perhaps a social reform, such as antitrust, could improve the welfare of 99% of the population, but according to economics' "Pareto standard," as long as one person—the monopolist themselves—is slightly worse off, economics cannot "justify" that the reform has improved the overall situation of society, because we do not know whether the total increase in welfare for the 99% can compensate for the decrease in welfare for that one person. This is not because of anything else but simply because economics does not believe we can equate and compare the utility of the 99% with that of the one person! Only if a portion of the additional gains from resource efficiency improvements during antitrust, which the monopolist considers themselves to have been "fully compensated" (economists' approval does not count), is distributed to the monopolist, can economics "recognize" that an improvement has been achieved. The improvements economics can argue for are only Pareto improvements.
Therefore, what is called Pareto efficiency is merely what economics can confirm as the "best," and Pareto improvement is the only improvement economics can confirm. Both indicate that as a science, economics has no say in all other possible social states and improvements that are not "unanimous" and cannot be achieved without anyone opposing them (because no individual's interests are harmed)! Understanding this, we can see why there are so many vested interests obstructing policies like antitrust, why there is so much debate with no absolute truth or authority (first because economics cannot provide such truth or authority).
Because of this, economics has taken the path of political economy in the issue of public goods, analyzing the mechanism of public good allocation through politics and studying the decision-making mechanisms of public policies, even the rules of decision-making at the constitutional level, such as whether it is "unanimity" or "majority rule," direct democracy or representative democracy, etc. Here, we can see that a good economist must be humble because any economic decision is not made by the economist themselves! Private decisions or a firm's decisions are made by the individuals involved; public decisions are made through a social process, involving many people (including politicians) and the research findings of many disciplines (sociology, political science, ethics, etc.). The contribution of an economist is undoubtedly, but also only, a part of it, and in many cases, it may be a very small part.
Of course, good economic policy recommendations must follow the logic of economics because it is your specialty, your unique perspective for explaining the world. If you want to discuss issues from the perspective of other disciplines (such as speaking from the stance of a priest, or acting as a government without being appointed), you would instead be failing to leverage your expertise and fulfilling your core responsibilities, thereby making a smaller contribution. However, when economists make policy recommendations, they must also be aware of the existence of other perspectives, other disciplines, and other logics, regardless of whether you believe those logics are logical or not.
But after clarifying all the above, we must also say that economics cannot "dominate everything," and other social sciences may be even less capable of doing so. Economics, after all, is more scientific and has stronger explanatory power and a broader scope of explainable issues due to its methodological characteristics, meaning it is more "imperialistic" than other social sciences.